How to Invest in Tax-free Mutual Funds

Video Transcript

"My name is Julie Asti, I'm a Certified Financial Planner with Asti Financial Management, and today I'm going to talk about how to invest in a tax-free mutual fund. Normally if you're going to be investing in a tax-free mutual fund, a tax-free mutual fund is going to be referring to a bond mutual fund that is going to be free from taxes, on the interest income that's going to be thrown off by the underlying bonds in the portfolio. When investing in a tax-free mutual fund, it's going to be important to take a look at the taxes and how they're going to be handled. For example, not all tax-free mutual funds that you're going to buy are going to be free from federal, state and local taxes. If you live in California and you buy a tax-free New Jersey bond fund, you are going to be possibly depending on the type of fund exempt from federal taxes but because you live in California and not New Jersey the interest income from that fund is still going to be subject to state and local taxes. So you have to take a look at the documentation and read the perspectives to make sure that it truly would be for your situation and your residency free from federal, state and local taxes. Again it's mainly referring to the interest income that's going to be thrown off the bond portfolio that would be exempt from taxes. The taxes - excuse me - the interest income that may be thrown off from the bond portfolio may still be subject to alternative minimum tax and that depends on your specific tax situation. Another important thing to note is that when they talk about a tax-free mutual fund, again we're referring to the interest income, you may buy a bond, tax-free bond mutual fund that's exempt from federal and state taxes, so you're not getting any interest income and paying taxes on that. But if you bought the fund and the share price was ten dollars a share, and five years later you decide to sell the tax-free mutual fund, mutual bond fund, and the price is fifteen dollars a share, you are still going to owe capital gains tax on the difference between your selling price, fifteen and your purchase price, ten dollars. So it only means exempt from interest income, not from underlying capital gains on an adjustment of your cost basis from your buy price to your sell price. So there are some things to consider when you're taking a look at a tax-free mutual fund to make sure it truly is going to be tax-free for your situation ,and that you do understand the tax ramifications for your situation. My name is Julie Asti, I'm with Asti Financial Management and you can learn more about my services or my company online at www.astifinancial.com."